The gold spot price hit a new high of $1,078 an ounce yesterday after India said that it would buy 200 tonnes of the precious metal from the International Monetary Fund (IMF).

The Reserve Bank of India’s $6.7 billion (£4 billion) deal removed concerns that the IMF’s gold could flood the retail market and weaken prices.

The gold price has been rising in recent months as countries and investors seek an alternative to the weakening US dollar. Gold has also traditionally been seen as a hedge against inflation and the combination of these factors has more than offset falling demand for gold jewellery.

The spot price hit a record, while the London afternoon fix, the London Bullion Market’s official price, closed at $1,061 an ounce, just below its record $1,066 set last month.

The IMF has announced plans to sell 403 tonnes of gold from its reserves of 3,217 tonnes as it seeks to raise money and increase its lending to developing countries.

Eugen Weinberg, analyst at Commerzbank, said that there were a number of reasons why the market had been cheered by India’s purchase. “Gold was kept off the market and sold directly to central banks, so potential sales on market are limited by this,” he said. “Secondly, it showed large buyers are ready to accept the current price levels.” China is tipped as a possible buyer for the remaining IMF metal, because that country is thought to want to diversify its foreign exchange reserves from US dollars into other assets. China has quietly lifted its gold holdings in recent years from 600 tonnes to 1,054 tonnes, worth more than $40 billion.

The United States holds more than 8,000 tonnes, the world’s largest central bank reserves of gold. The Bank of England holds 310 tonnes after Gordon Brown sold 395 tonnes in 1999 when he was Chancellor. The average price achieved was $275 an ounce — about a quarter of yesterday’s price.

Aram Shishmanian, chief executive of the World Gold Council, said: “Gold always plays an important role as a protector of wealth and, in these current times of financial instability, that role has taken on a new-found prominence. In light of the well-publicised concerns of many central banks over the level of their exposure to the US dollar, further off-market transactions must be a clear possibility.”

Russia is another country that has been building its gold reserves in preference to US dollars. It has added 95.8 tonnes in the past year and now holds 568.4 tonnes.

Dominique Strauss-Kahn, managing director of the IMF, said: “This transaction is an important step to help to put the fund’s finances on a sound long-term footing and enable us to step up much-needed concessional lending to the poorest countries.”

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